MacroProfit: Happy Anniversary WW1

You began July 28, 1914 and lasted until November 11, 1918.  You saw 9 million souls taken and countless millions more become homeless, destitute and scarred in one way or the other.

Your belligerents were the great powers of the United Kingdom, France and Russia on one side and Germany, Austria-Hungary and the Ottoman Empire on the other.  You somehow convinced the United States and Japan to hold hands and jump into the fray.  Imperialism was your kindling but the assassination of Archduke Franz Ferdinand of Austria was your match.  Trench lines were dug, fronts established, governments/kingdoms came and went and the world was never the same again.  Yes, Happy Anniversary WWI.

In this month’s issue of MacroProfit we analyze the two bookends surrounding 100 years of War.  We will look at how, over the past century, little has changed in the world. Technology, of course, has advanced (depending on one’s point of view) and therefore the killing machine has become more sophisticated yet the military industrial complex, the international banks, the intellectual beliefs and the rest of the monied interests remain the same.  “There is money to be made when you ride to the sound of guns” but make no mistake understanding how, why and who to follow is paramount if survival is to be maintained.

Open up your mind to things you’ve never known before as we explore MacroProfit’s world of

War

When WWI concluded most focused their attention on the reparations imposed upon Germany at the Treaty of Versailles.

The so called cost of war was imposed upon Germany and directly led to the hyperinflation, depression, and consequent rise of Nazism and ultimately Adolph Hitler.  Millions of words have been written about those events and that Treaty, however, something else occurred that has been fomenting these past 100 years and may have as much significance for the region and the world as anything else.

The Ottoman Empire, which stretched from Budapest to Baghdad had, by the beginning of the Great War, become a meek shadow of itself and teetered on the edge of collapse.  Aligned with the Germans and Austrians, the Ottoman problem became one for the Allies after the surrender.

Britain and France saw their own weakness in imperial commitments and looked for ways to maintain their interests without depleting their treasuries.

Mark Sykes and Francois Georges-Picot, two diplomats from England and France respectively, concluded a secret agreement prior to the Paris Peace Conference of 1919.

They established the boundaries for what would become Iraq, Syria and the modern Middle East.  In addition, perhaps more importantly they formalized an understanding that established powers would ensure territorial integrity and sovereignty of nascent powers until those powers could stand on their own.  In theory the strong would protect the weak.  Unless the weak had something the strong wanted, in this instance, OIL.

For most of the past 100 years the Sykes-Picot Agreement has been the basis which has more or less held the Middle East together. Now that ISIS, the Islamic State of Iraq, and the Levant and Al Qaida offshoots are advancing through the region and are being embraced by the populous.  It would seem that after 100 years the map of the Middle East will finally be redrawn.  The Iraqi Syrian border has all but ceased to exist and the trumpets have been blown from Libya to Egypt – Gaza to Afghanistan-WAR-the next phase.

How we respond financially and militarily will dictate many things not the least which is the repercussion and impact upon our economy.  For the past dozen years we have been mired in Iraq, Afghanistan, Libya, Syria and now Iraq again.  We fought these wars militarily, financially, and in the court of public opinion.  One could say that the military industrial complex has been the only industry to continue to thrive since the .com crash.  Going forward, however, will dictate just what we are willing to pay in money, energy and even human life to take all this to the next level.  It seems like the combatants who called the Middle East home over these past dozen years have only been warming up for what is to come.

If we escalate our War effort, in a perverse way, it may be the only thing that saves this economy from utter collapse.  War employs both on the battlefield and also in the factories and real employment is what we are so sadly lacking.  Should this start to get out hand then politicians who only know Keynesian philosophy, Obama included, will relish this opportunity and people like Senator John McCain will be pounding the drums for War.

Perhaps the incident that best reflects money and War occurred just prior to the US entry into WWI.  Most everyone, including the President, was opposed to going “over there”. European entanglements were not high up on anyone’s chart except, of course, Wall Street.  At the time JP Morgan not only was financing Britain in her conflict but was also enjoying handsome returns from a foreign bond market that seemed to be invincible.  The only thing that could have been a fly in the ointment was a loss by the British and the Allies.  That was something that was not only unthinkable but also would have been very costly to the Morgan folk.  Cash flow would have dried up and millions of dollars of bonds would have become worthless.

While the ground forces were battling to a draw in the trenches the German U-boats were blocking food flows into the island of Great Britain.  The possibility of Germany winning the War was very real.

The Cunard Line, a rival of the White Star Line, owned by JP Morgan, (the Titanic was a Morgan ship) featured its premier passenger/armament ship, the Lusitania.  On the Lusitania’s final voyage from West to East her manifesto listed cheese, beef, and wine among other things.  In addition, she transported several hundred passengers who were oblivious to the Lusitania’s true motive. Several decades later diver’s confirmed millions of rounds of ammunition in her hold.  The Lusitania was a gunrunner and the Germans knew it.  In fact, everyone knew the truth and all including the British Admiralty went out of their way to invite a German attack.  When the Lusitania was sunk the American cry for WAR was loud and clear not the least of which came from JP Morgan and Wall Street.

 

Within a few weeks, Congress authorized cash payments created by the Federal Reserve to bolster England.  These payments were then simply rewritten back to JP Morgan which found themselves whole again and out of financial danger.  Wall Street went on to finance not only the Allies but also the Axis powers much like WWII.  Had not the US entered the War that was practically over, the banking landscape could possibly be much different today.  Was it just coincidence that the Lusitania sunk or a scheme hatched by the Keynesians at Broad and Wall?  War does make strange bedfellows.

As we leave the First World War we should be reminded of what Senator Hiram Johnson said in 1917 “The first casualty when War comes is truth”.

Since that first great World War the American people have been brainwashed into thinking that there are only two ways a superpower can operate in the world.  The first is to cut itself off totally from the rest of the world in a practice called isolationism.  The second is to be what the pundits call engaged in the world.  This means to be involved in all aspects of a country’s affairs when we have a so called “vital interest”.  Two concepts to be debated- “engaged” and “vital interest.”  Considering that in many countries a McDonald’s is on every street corner, it could be said that the position the United States takes in the so called debate is the latter not the former.  A middle ground has never been considered.

Isolationism was immediately discarded as foreign markets, energy fields and consumerism started becoming a way of life for this government and corporations alike.  Of course, with involvement comes international militarism.

George Washington’s alternative of neutrality through trade and visitation with no political ties became a long ago distant memory and, of course, completely discarded. (click here for a complete list of Washington’s Advice)

In the Great War truth was abandoned to whip up war hysteria.  The HUN was coming, Beethoven was banned. Sauerkraut became Liberty cabbage and innocents were killed on the Lusitania.  Terrorism had begun and the guys in a German uniform were named which is why so many Schmitz’s became Smiths.  One hundred years ago we were convinced it was the right thing to do.

A century later the same propaganda machine is still in full swing.  As a matter of fact, they never ceased through World War II, Korea, Vietnam, Desert Storm, Afghanistan and now.

It has been War in one form or another for 100 years and we are still convinced it is the right thing to do.

Now we bridge the gap and look at War 21st century style.

Prior to 1914 WAR was neat and tidy.  One country was insulted/attacked by another and went to War.  Lines from the last War were drawn but never really accepted by the loser.  One country’s religious leaders felt impelled by God to deliver the true religious message to the heathens.  The reasons for War were clear.  The antagonists and the conflict were usually contained in their region. World War I and its integrated alliances changed everything. The Great War, the War to end all Wars was to take armed conflict to a whole new global level.

Currently almost 12% of the world is at War and an even greater percentage is on the verge.  The more obvious areas such as the Israeli invasion of Gaza and the conflict between Ukraine and Russia come immediately to mind.  However, Civil Wars in Syria, Afghanistan, Iraq, and Somalia are just as significant.  Turmoil in Kenya, Pakistan, Sudan, Yemen and Libya all add to what the most recent report from the United Nations Human Rights Agency calls “having no parallel in the contemporary world”.  Perhaps only Columbia the U.N. says looks like a multi-decade conflict is finally staggering to its end.  Thailand, Indonesia, China, Japan, South and North Korea and Vietnam also are added into the mix although not garnering the same headlines as the Middle East.

Although War in the 21st century does not take on the same global scope as WWI & II in battlefield proportion it does rival and exceed its predecessors in the following:  oil production, foreign direct investment, GDP, trade, gross capital formation, corporate profits, market capitalization, inter-bank claims and portfolio investment inflows.  In short, while War is being waged, the truly dramatic battlefield is in the area of money.  Make no mistake people are being killed, airliners are being downed but the greater or long lasting effect is in the area of finance.

Most recently Russia and China concluded a pact for an energy delivery from the biggest producer Russia to the biggest consumer China.  (Click here to view article-opens a new window) Most notable was the agreement to bypass the usage of petrodollars (US currency), in favor of direct currency exchange.  To help facilitate this historic agreement, the BRICS-Brazil, Russia, India, China and South Africa, have created their own central bank to once again be able to bypass the loathed and dreaded US dollar.  They established an initial authorized capital of US$ 100 billion, and an initial immediate capitalization of US$ 50 billion, equally shared among founding members.  The BRICS are, on the surface, trying to “forestall short term liquidity pressure, promote further BRICS cooperation, strengthen the global financial safety net and compliment existing international accomplishments….the agreement is a framework for the provision of liquidity through currency swaps in response to actual short term balance of payment pressures.”

Translated this means:  it’s time to form alliances as a shakeout is on the horizon and being tied to the US dollar could be dangerous.

It would seem that as in the past when the sounds of the drums of war are beating either on the battlefield or in the boardroom a safe haven would be gold.

Unfortunately, contrary to the Inflationistas and Goldbugs Proclamation, gold continues to neither be a safe haven nor a storehouse of purchasing power.  Over the past 4 years gold at $1,700 saw its next direction down as opposed to up.  $2,000 an ounce was a given and $1,500 an ounce was something to be seen in the rear view mirror.  Unfortunately, wishing it so doesn’t necessarily make it so.

A break below $1,300 has set the stage for one more deep and dramatic drop in Gold.  Should Silver confirm the break with a coordinated decline the stage could be set for Gold’s return to triple digit value.

Gold today is not a currency!  It is simply just another asset class and trades accordingly, at the moment, regardless of a world in flames.

War comes not from one gigantic incident but from the accumulation of a series of events.  The risk that any one of these can be the trigger that gets things started grows greater every day.  In this calculation an unintended action an incorrect response or an isolated incident could be the impetus for a worldwide conflagration.

Most recently in response to the so called sanctions imposed by the West against Russia Vladimir Putin has declared a war against capitalism – Western style.

He is currently banning the import of certain kinds of agricultural products, raw materials and food originating in a country that has imposed economic sanctions against Russian companies and (or) individuals who have joined such sanctions.

A dire threat to the American citizenry? Not exactly.  However, companies like McDonald’s and Pepsi Co could very well see their bottom line affected dramatically.  Apparently on the international stage the War, until it is not, will be fought in the pocketbook.

https://youtube.com/watch?v=g5-6JL161Xc

Make no mistake that as battles are being fought below the headlines the traditional elements of warfare continue to mount.  Russian troops and equipment continue to build on the Ukrainian eastern border.  The Black Sea continues to fill with UN and US warships.  ISSIS takes control of the Iraqi water supply.

“The world has changed and changed dramatically” said Sergey Shoigu, the Russian Defense Minister.  There are many ways to interpret this comment the least of which is that after 60 years of standoff between the Super Powers it appears the fear of worldwide conflict is no longer off the table.

We have quickly jumped from the assassination of an Archduke to a country in the Balkans dominating in the headlines.  As disjointed as everyone seems how does one prepare oneself for what seems to be driving toward this logical conclusion?

Make no mistake everything and I mean everything is tied together.  An SEC announcement about money market is as significant as the downing of a commercial aircraft.  Difficult to imagine isn’t it? If the Russian Defense Minister is right how should you prepare for the inevitable?  Let’s make a list so you can check off where you start.  We want no cognitive dissidence that it can’t happen here because it never has before.

THE GOOD –

  1. Cash in a bank account insured by the FDIC
  2. Cash in a mattress for the moment that ATM’s are shut down and no one accepts checks or credit cards
  3. A reverse mortgage that extracts the equity from your home now before the renewed heavy decline in addition to the elimination of a house payment
  4. Laddered (billtatro.com/laddering)  Treasuries every 6 months for 2 ½ years
  5. Insured annuities with guaranteed income benefits
  6. REIT’s leveraged in healthcare, hotels and food

THE BAD –

  1. Money market accounts and bond funds both susceptible to Federal Reserve gating and bail-ins
  2. Gold and Silver in a deflationary environment
  3. A stock portfolio with no insurance against it such as calls or stop losses

THE UGLY

  1. Continued personal deficit spending living on credit cards and beyond your money
  2. Junk and high yield bonds
  3. Any kind of unsustainable debt
  4. Substituting growth for income

Aside from one’s money, having and knowing how to use a firearm is most practical in these uncertain times (think about that one).

We will update our MacroProfit subscribers with periodic releases over and above our normal radio and email channels.  Events are fluid and you need to know.

Make no mistake the world has become a very dangerous place and can no longer be written off as something for others to worry about.  The reason is that we have “kicked the can down the road” for so long that we have finally run out of road and reached the ultimate conclusion.

General Douglas MacArthur said it best at the Japanese Surrender Ceremony aboard the U.S.S. Missouri on September 2, 1945.

“A new era is upon us.  Even the lesson of victory itself brings with it profound concern, both for our future security and the survival of civilization.  The destructiveness of the war potential, through progressive advances in scientific discovery, has in fact now reached a point which revises the traditional concepts of war. Men since the beginning of time have sought peace…Military alliances, balances of power, leagues of nations, all in turn failed, leaving the only path to be by way of the crucible of war.  We have had our last chance.  If we do not now devise some greater and more equitable system, Armageddon will be at our door.”

 

 

KNOCK, KNOCK!

‘Til next time,

>>>>>>>>>>>>>>>>>>>>>>>>>>

MacroProfit is for education and entertainment purposes only. The information contained within is not a recommendation to buy or sell securities. All individuals possess different risk tolerances and should consult an advisor before making any transaction to ensure it fits their financial goals. Furthermore, individuals should understand the tax consequences of any investment and should speak with their tax advisor before making any transactions.
Written by
With his passion for economics Bill Tatro has been entertaining audiences on the radio and in seminars for decades. Bill is an economist that provides weekly paid content to subscribers, and offers a free daily "lite" version as well.